Conditional Offer of Coverage for Spouses

Question: My client would like to only allow only spouses who do not have other coverage to enroll on their benefit plan. Is this permissible?

Compliance Team Response:

Conditional spousal offers of coverage are permitted.  There is no requirement under the ACA pay or play rules to offer coverage to a spouse (the offer requirement applies only to full-time employees and their children to age 26), which is why it is commonly thought that spouses will lose eligibility under many employers plays if the Cadillac tax ever takes effect. 

In any case, although it is permitted, it’s very uncommon to impose that type of exclusion.

Spousal surcharges and incentives not to participate are slightly more common.  Here’s a summary:

Spousal Surcharge

A spousal surcharge is an additional amount paid by an employee when the employee elects coverage for his or her spouse and the spouse is eligible for group health plan coverage from another source, such as the spouse’s own employer. (Alternatively, the arrangement could be structured as a discount or reduction in the amount paid for spousal coverage by an employee whose spouse does not have access to other coverage.)

Example: ABC Corp has decided to charge an additional amount per month to any employee who elects to cover his or her spouse under ABC’s major medical plan, if the spouse is eligible for major medical coverage under another employer health plan. The spousal surcharge will be $110 per month. If the spouse is not eligible for major medical coverage under another employer health plan, the surcharge will not be imposed.

From the company’s perspective, a spousal surcharge creates an incentive for an employee’s spouse to enroll in the spouse’s own employer plan—perhaps to also enroll the employee in the spouse’s plan (assuming that plan does not impose a spousal surcharge). For employees who continue to cover their spouses despite the surcharge, the surcharge effectively reduces the employer’s share of the cost of the spouses’ coverage. For employees who decide not to enroll their spouses, the employer saves the contributions that it would otherwise have made toward the spouse’s insured coverage or, if the benefit is self-insured, the money it would have paid in benefit claims for those spouses.

**The Problem: **Spousal surcharges are very unpopular with employees. Even if the arrangement is structured as a reward or discount (rather than an extra amount that an affected employee must pay), affected employees still will not like having to pay more than their colleagues pay for the same coverage. It can also be difficult to define what type of “other coverage” will trigger the surcharge.

There are also new ACA reporting codes required where employers impose a spousal surcharge.

Lastly, spousal surcharges are close to unenforceable.  It is nearly impossible to verify whether an employee’s spouse has access to other coverage.  Without the teeth of any effective audit potential, these generally need to be run on the honor system—which can lead to employee fraud issues.

Incentive For Spouse Not to Participate

Some employers have chosen instead to offer taxable incentives or rewards for employees not to enroll spouses (and other dependents) in the employer’s health plan. For example, an employer could pay an employee $100 per month in additional (taxable) compensation if the employee does not enroll the employee’s spouse in the employer’s health plan—without regard to whether the spouse works or has access to other coverage.

**The Problem: **A significant downside of this approach is that it is not well-targeted—the employer will end up paying incentives to some employees who would not have enrolled their spouses anyway.  In other words, it can end up being a windfall to the employee.

Brian Gilmore
The Author
Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.

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